Economies and markets

Happy markets, struggling workers

A NEW survey from the Money Advice Service finds that more than half of Britons are struggling to pay their bills and service their debts, despite record low interest rates. Meanwhile, the FTSE 100 index is up 16% this year. In the US, median real household incomes rose just 0.1% annually in June (on an estimate by Sentier Research) and are still well below their level before the crisis. The Dow and S&P 500 are at all time highs; corporate profits are at a post-war high relative to GDP.

In short, investors are rolling in it, while ordinary workers still struggle. How long can this last? True, higher equity prices are good news for workers in pension funds, although the effect is offset by low interest rates which make it more expensive to generate the actual pension income. But at the bottom of the ladder, many workers have very small pension pots in any case - and are facing the squeeze of austerity programmes that tend to hurt the poorest.

This will surely show up in some way in the form of political protest (such as the recent strike by fast food workers) in the US. and it will also show up in consumption pattterns - those businesses most dependent on the lower paid will suffer, while it will be good news for luxury goods producers.

The defence of this policy, I suppose, is that better sentiment among investors and businesses will encourage job creation and that will help the lower-paid; we may see this confirmed later today in the payroll numbers. The trickle-down effect revived, one might say. But it ought to be a source of unease for policymarkers that the gap between the financial markets and the rest of the economy seems so large.

If strong investor income was return on capital, then competition between producers would result in growing investment activity (decent margins, low cost of finance).

Instead, we are seeing high returns without the impetus to investment. In other words, growing profits are increasingly based on rent seeking activity rather than productive investment.

That's an important consideration. What are the facilitators of corporate rent seeking here?
- patents
- access to finance
- corporation tax (which places market entrants at a competitive disadvantage viz-a-viz large entities that can circumvent it)
- maybe consumers are too loyal to brands?
- maybe employees are too loyal to employers?
- maybe sticky government procurement is a large part of the problem?

Some Marxist economists would say the interests of Capital and Labour holders are naturally opposed,
so that equity capital holders should be happy with struggling workers and low wage growth. They may be less surprised by record-high stock prices than by the mild backlash of short-changed workers.
The trickle-down economics is meant to make that neat distinction out-dated and may have succeeded. Today's US jobs figures suggest there's an excess optimism about its beneficial effects, but after smoothing the series out and taking in the frequent revisions there's a decent uptrend in new jobs nevertheless. In spite of burger-flippers' anger, widespread political protest is unlikely in America, less so in parts of Europe where jobs actually disappear.

- high costs of transport (declining numbers of people have cars; high fuel taxes limit distance of travel for most consumers) result in fragmented and less competitive consumer markets.

- a growing share of GDP is locked up in education & healthcare, where competitive pressures are notoriously weak, and profit-making participants enjoy massive returns but little incentive to invest.

- a growing share of GDP is plunged into legal services, which is a winner-takes-all (massive premiums to the best credentials) rent extracting sector, essentially devoid of capital.

- a few megabusinesses like Apple (2012 revenue 1.2% of US GDP, profit 0.3% of US GDP, capital intensive work outsourced to the lowest bidder) are charging insane margins for inferior products, but somehow getting away with it, without much competitive pressure yet, or inducement to invest & expand supply (indeed, starting hundreds of lawsuits to prevent other businesses from opening supply).

Agreed, when will we wake up.
The same is happening in Australia.
Politian's trying to make us think they have
our(the peoples)/country's best interest in mind;
yet are just making themselves richer @ the people's expense. Just look how Queensland government tells ppl have to tighten belts and job cuts so they can then give themselves obscene pay rise's

The majority has less purchasing power because the bank is printing it away. Printing is redistribution. In this case, the bank is confiscating from the majority, and redistributing the loot to the financial sector.

Pensions will not benefit in the long run from printing creating yet another stock bubble. Capital is being misallocated by printing, which means future stock returns will be sub par. The S&P is priced to lose ground to inflation for yet another decade. A short run bubble will not change this.

Austerity is being caused by diverting resources from other programs into bailing banks out of the housing bubble that banks printed. That and printing is confiscating purchasing power from revenue, so money does not buy as much as it used to. Many countries had sensible budgets and reasonable debt before the bank bailouts began. Since banks are printing another bubble, another bank bailout will be needed in a few years.

Of those, I think the various simplifications are the most important. Make the planning system simpler -- simpler to navigate and simpler to comply with. Make the tax system simpler -- likewise. Make the patent system simpler, to assure that patents are granted to real and specific innovations, not for glittering generalities or minor tweaks to existing technologies. Simplify the legal system, to make it easier for everyone to understand and follow. (It is insane that it requires legions of lawyers just to make reasonably sure that a business is actually complying with all of the odds and ends of the law. Likewise that it is essentially impossible for an individual to live in our society without routinely violating some law or another.)
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All of those will reduce the resources wasted on bureaucratic nonsense. And, as a result, make it far easier for innovative new companies to get started. It's bad for those whose jobs consist of extracting rents from navigating the mess. But then, automobiles were bad for the buggy whip manufacturers, too.

Realistically, what can and should be done in response to such trends?

- shortening patent duration

- drastically curtailing the scope of patentable technologies (if I can draw it with standard CAD software, then it shouldn't be considered a new technology; if I'm merely applying OpenCV stereovision with a calibrated set of cameras in some industrial application - a pretty standard sensor and inference setup - then that shouldn't be considered novel)

- abolishing corporation tax, and instead shifting the revenue burden to VAT (which falls proportionately across all value creating activity, no worse for market entrants than established entities)

- shifting from benefits-in-kind to direct cash transfers, reducing inequality but giving individuals more control of the spending on their behalf (stronger competitive pressure)

- online public procurement listing & API, in which all opportunities, bids and contracts are transparent (and where citizens and participants can give feedback or comment)

- reforms to banking & financial regulation that make it easier for finance to be extended to SMEs or market entrants (any specific ideas here?).

- reducing the volume of legislation and simplifying legislation, so that (1) fewer legal processes result from badly drafted law, (2) fewer legal processes result from confusion over legal obligations, (3) there is greater predictability of legal outcomes, and less space for a good lawyer to have much impact on the outcome of a case, thereby reducing potential for rent extraction.

When Henry Ford lowerd the price of automobiles and increased pay it resulted in a surge of demand portraying the consumer society. Today consumers are stuck in debt of many kinds and therefore unable to increase demand. With low demand companies invest little and seem make much money. Increased savings will only make this worse. Without writing off some debt we are all stuck. In the meantime debtores feed creditores if not by high interests, then by investing the created liquidity intended to aid the debtores, on financial instrumentes. Misallocation of aid called QE.

Yes. Rent seekers are destructive but unfortunately not checked by Politicians. Rent seeking activities beyond a point can only lead to markets good for trading (now) as against investments for growth. Problem is compounded in economies operating under State Capitalism model where vested interests continue to stifle growth.

most of the worlds problem is greed.
ppl need to live within their means.
Unfortunately society puts importance
on what ppl have and not who they are.
even when you do live basically, and for each
other, society puts pressure on kids to have the best and more than the next person. I will apologise for any grammar/typing errors here as i'm not a typist, it's 5am and cold- so one hand is keeping warm while i'm typing. please accept my apology and enjoy yr day

most of the worlds problem is greed.
ppl need to live within their means.
Unfortunately society puts importance
on what ppl have and not who they are.
even when you do live basically, and for each
other, society puts pressure on kids to have the best and more than the next person. I will apologise for any grammar/typing errors here as i'm not a typist, it's 5am and cold- so one hand is keeping warm while i'm typing. please accept my apology and enjoy yr day

Your reply is a bit too glib. As you know the current problems stem from a credit-fuelled bubble in part of the economy. So the question is who should be doing the saving?

The man on the street and the small saver are saving through real cuts in their income.

Some states have cut some nominal levels of expenditure by passing on the cuts to the poor.

The central banks have done all that is inflationarily possible to maintain at least the nominal values of assets that are important to the important part of the electorate and thus accelerated the redistribution from the poor to the rich. Indeed policy since 2008 seems to have been largely about seeing how far the middle class (Western politicians haven't cared for years about the poor because they don't vote in large numbers) can be pushed before they start writing letters to the editor. My guess that the target for headline inflation is 4 - 5 % with real inflation of 2 - 3 %. This is easier where there is apparent consensus, policed by the banks, across party lines except for the obvious extremist freaks.